How Pyramid Schemes Work

By: Dave Roos

Multi-Level Marketing and Pyramid Schemes

Women, some with products on their heads, attend a Tupperware party in 1950. Tupperware is one of the many successful companies that uses multi-level marketing techniques.
Hulton Archive/Getty Images

Multi-level market (MLM) or network marketing is an American institution. Companies like Amway, Tupperware, Herbalife, Avon, Mary Kay and The Pampered Chef support huge networks of distributors and recruits who sell every type of product from dietary supplements to kitchenware to beauty products. Salespeople are called independent business owners (IBO) and generally work from their homes.

On the surface, it's hard to tell the difference between a legitimate MLM and a pyramid scheme. That's because they're both built on the business model of "multiple levels" of distributors and recruits. Some critics of MLMs claim that all of them, even the supposedly "legitimate" ones, are pyramid schemes in disguise.


In a landmark 1979 ruling, the Federal Trade Commission found that Amway was not a pyramid scheme. That ruling has paved the way for hundreds of MLMs to follow Amway's business model. The Amway Web site highlights the differences between its unique "business opportunity" and a pyramid scheme:

  • Amway doesn't pay distributors for simply recruiting new salespeople.
  • The only way to make money through Amway is either by selling products directly to consumers or by managing a team of salespeople. Managers get a percentage of each of their recruits' sales.
  • Amway doesn't require its salespeople to buy starter kits or impose a minimum monthly order value to stay a member. [source: Amway]

Amway stresses that the main difference between a legitimate MLM business model and a pyramid scheme is that a legitimate MLM is focused on selling products, not recruiting more salespeople. In a legitimate MLM, it should be possible to make money by simply selling products directly to customers. With that main criterion in mind, here are some other ways to identify product-based pyramid schemes:

  • Pyramid schemes offer money for simply recruiting people. This money can come as a commission from the sale of a starter kit or as a recruiting "bonus."
  • Avoid any MLM that puts much more emphasis on recruiting salespeople than selling the actual product.
  • Pyramid schemes charge steep startup costs for joining, including mandatory training, a starter kit and a non-refundable membership fee.
  • Beware of any MLM that allows five or more levels of distributors to collect commissions on a single sale.
  • Make sure that the products being sold have real value and a competitive price. Are they reputable brands? Have the manufacturers been involved in recent lawsuits?
  • Avoid MLMs that only sell lists of sales leads to other MLM salespeople. This is most likely outdated information that has made the MLM rounds several times before.
  • Avoid signing up for an MLM as part of a high-pressure motivational event. Consider the information carefully and take it home to think about it.
  • Be wary of anyone who tries to sell you on an MLM by flaunting their personal wealth. Realize that many of the people who claim to have made millions through MLM have actually made their money selling books and videos on how to make millions through MLMs.
  • Bottom line: If it sounds too good to be true, then it probably is.

Now let's look at some of the most famous pyramid scheme scams from the past and present.